CWS Market Review – October 18, 2013

“Democracy is the art and science of running the
circus from the monkey cage.” – H. L. Mencken

You know it, H.L. On Wednesday evening, the absurd 16-day government shutdown finally came to an end. Unfortunately, the deal doesn’t resolve the issue in question; it merely kicks the can down the road for a few more months.

Previously, I had said that some deal would be reached because there was simply too much to lose if the politicos had let this silliness carry on much further. One of the ratings agencies put the U.S. on notice, not due to our finances but due to our politics. How sad is that?

Fortunately, Wall Street remained calm and anticipated that a deal was near, as stocks rallied impressively over the past week. As it turned out, the S&P 500 rallied 2.4% over the course of the 16-day shutdown. On Thursday, the S&P 500 closed at 1,733.15, its highest level ever. Our Buy List is also at a new all-time high. We’re now up 27.7% for the year, which is more than 6% ahead of the S&P 500.

In this week’s CWS Market Review, we’ll take a look at our recent Buy List earnings reports. Last Friday, JPMorgan Chase ($JPM) beat expectations by a mile. That is, when you discount their gigantic legal bills. I’ll also preview the three Buy List earnings reports we have coming next week. Later on, I’ll list several updated Buy Below prices for our stocks. But first, let’s look at the strong earnings reports coming from our big banks.

Strong Earnings from JPMorgan and Wells Fargo

Shortly after I sent out last week’s newsletter, Wells Fargo ($WFC) reported third-quarter earnings of 99 cents per share. That was two cents more than analysts had been expecting, and it was a nice increase from the 88 cents per share they earned last year.

As I expected, there was a big slowdown in home refinancings. Wells had been riding that gravy train very well for the last few quarters, so the easy money had been made. Rising mortgage rates have altered the economics of that business. The important point for Wells is that the economy continues to improve, albeit slowly. This means that fewer people are late with their debt payments. Last quarter, Wells was able to release $900 million worth of reserves for credit losses.

I was troubled to hear that Wells announced layoffs in its mortgage division, which I can’t say was unexpected. That move clearly helped Wells’s bottom line last quarter. The bank’s total revenue fell from $21.1 billion last year to $20.5 billion this year. The reserve releases and cost-cutting drove the higher profits.

This is one of the advantages of investing in well-run companies: they’re able to change when the environment changes. The stock initially dropped in early trading last Friday, but traders soon came to their senses. By the end of the day on Thursday, WFC was at a four-week high. Wells Fargo continues to be a good buy up to $45 per share.

Also on Friday, JPMorgan Chase ($JPM) reported a loss of $380 million, or 17 cents per share. But I have to note that that includes a massive $7.2 billion charge for the bank’s legal bills. Excluding that, the bank earned a profit of $1.42 per share, which easily topped Wall Street’s forecast of $1.30 per share. I said JPM could earn as much as $1.50 per share, which seemed very optimistic at the time, but I wasn’t that far off.

If we dig into the numbers at JPM, we see that the business’s outlook is very similar to Wells’s. I honestly don’t see how Jamie Dimon can stay at the helm considering the massive legal bills they have. Still, the core businesses are running well. JPMorgan Chase remains a good buy up to $56 per share.

Stryker Is a Buy up to $75 per Share

After the bell on Thursday, Stryker ($SYK) reported earnings of 98 cents per share which missed expectations by two cents per share. Revenues for the orthopedics company rose 4.8% to $2.15 billion, which hit consensus on the nose.

This earnings miss isn’t such a big deal. The important thing is that they reiterated their full-year guidance range of $4.20 to $4.26 per share. Stryker has unfortunately been getting nicked by currency exchange. The company estimates that the impact on the top line this year from forex will be between 1.5% and 2.0%. When looking at a company, I try to look past these issues. Sometimes foreign exchange helps you, sometimes it hurts. What I want to see is a strong, healthy business.

I think Stryker looks very good here. Many investors felt that it was going to get hammered by the implementation of President Obama’s healthcare reform. Stryker started the year very strongly, and it has gradually drifted higher since then. It’s now a 32% winner on the year for us, and I’m expecting another dividend increase in a few weeks. This is a good company. I’m raising our Buy Below on Stryker to $75 per share.

Earnings Next Week from Bard, Microsoft and CA Technologies

We have three more earnings reports due next week: Microsoft, CR Bard and CA Technologies. Let me add that I track the releases as best as I can, but some companies aren’t very forthcoming with their earnings dates, so there might be some errors.

Microsoft ($MSFT) finds itself in the unusual position of being widely criticized, yet the financial results are still pretty decent. Everyone likes to predict the end of MSFT, but the folks in Redmond still churn out a healthy profit. The software giant is due to report earnings on Wednesday, October 23.

Three months ago, Microsoft missed big and the stock got slammed. MSFT has since recovered, thanks in part to the news that Steve Ballmer will be leaving. For Q3, Wall Street has set the bar quite low. The consensus is for earnings of 54 cents per share, which is only one penny higher than last year. They should be able to top that. I also like that Microsoft recently raised their dividend to 28 cents per share. That was a bold move. The shares now yield 3.2% which is very good for this market. I’m raising our Buy Below on Microsoft to $37 per share.

CA Technologies ($CA) has been a surprisingly strong performer for us this year. This is one of the more conservative stocks on our Buy List, and it’s ideal for folks who get antsy from a lot of volatility. CA’s earnings report is due next Thursday, October 24, and it will be for their fiscal second quarter. The company has already said they see full-year earnings (ending next April) coming in between $2.90 and $3.00 per share. Wall Street’s consensus for the quarterly report is for 73 cents per share. The last few earnings have beaten estimates by a good margin. Look for another strong number. For now, I’m keeping our Buy Below at $31 per share but I may raise it soon.

CR Bard ($BCR) has been a remarkably good stock lately. It’s risen for six of the last seven trading sessions and is at a new 52-week high. I know many investors don’t like high-priced stocks, but it really is an irrational fear. Bard will report its earnings on Tuesday, October 22. The company has told us to expect earnings to range between $1.37 and $1.41 per share. I think they’ll hit that with little difficulty. I’m raising our Buy Below on BCR to $126 per share.

Several Higher Buy Below Prices

My plan was to hold off raising our Buy Below prices until earnings came out, but the market’s dip and recovery during the shutdown altered those plans. The market’s recent surge has pushed several of our stocks out of range, and I don’t want investors left behind. In addition to the higher Buy Below prices I’ve already mentioned for Stryker, Bard and Microsoft, I have a five more this week.

AFLAC ($AFL) has been particularly strong lately (see chart below). The shares broke $66 on Thursday and look as strong as ever. Expect another good earnings report at the end of the month. I’m raising my Buy Below on AFLAC to $70 per share.

Fiserv ($FISV) continues to be a rock star for us. The stock reached a new 52-week high on Thursday. What I love about Fiserv is the steadiness of their earnings growth. The next earnings report comes out on October 29. This week, I’m raising the Buy Below on Fiserv to $108 per share. This is another solid stock.

Nicholas Financial ($NICK) has been very strong lately. Some of these smaller stocks can sit and do nothing for weeks and then suddenly spring to life. We still haven’t heard anything about the buyout offer, but given the stock’s performance, I’m not sorry if the board shot down an inadequate offer. I think we’ll see a nice dividend increase before the end of the year. I’m raising our Buy Below on NICK to $18 per share. Go NICK!

Moog ($MOG-A) is still our #1 performer this year, with a stunning 44% gain. It’s hard to believe that almost a year ago Moog was going for $34 per share, and now it’s closing in on $60. The company hasn’t announced when it will release earnings for Q3, but it should be within the next two weeks. I’m raising our Buy Below on Moog to $61 per share. I still want to keep a tight range on this one.

Cognizant Technology Solutions ($CTSH) continues its upward climb. This stock has been a phenomenal performer over the last four months. Last Friday, CTSH nearly cracked $89 per share. It was close to $60 this summer. Earnings are due out in early November. I’m raising our Buy Below on Cognizant to $90 per share.

That’s all for now. Stay tuned for more earnings next week. Now that the government has reopened, we’re also going to get economic reports again. Plus, we’ll get the backlog of reports. On Tuesday, the Labor Department will finally give us the September jobs report. A tepid report may cause the Fed to hold off on any tapering plans until next year. Plus, we don’t know the full impact of the government shutdown, but it wasn’t good. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

– Eddy

Posted by Eddy Elfenbein on October 18th, 2013 at 7:07 am

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.